Cho High Court Decision 2010Du2148 ( October 27, 2011)

Gift tax is illegal because the increase in property value cannot be seen as an objective reason.

It cannot be deemed that the sum of gains from transfer is based on the business judgment of the purchaser, and the increase in the value of property is objectively expected, and there is a need for more restrictive interpretation since the donation by another person's contribution is very diverse and standardized. Thus, the gift tax is illegal in view of the fact that there is a need for more restrictive interpretation.

2011Guhap28240 Revocation of Disposition of Imposing gift tax

x 4 others

Head of the District Tax Office and two others

April 6, 2012

August 17, 2012

1. The imposition of each gift tax stated in the separate sheet that the Defendants made against the Plaintiffs shall be revoked.

2. The costs of lawsuit are assessed against the Defendants.

The same shall apply to the order.

1. Basic facts and circumstances of dispositions;

A. The plaintiff CC is the wife of the head of the XX Group KimA, and the plaintiff jB is the wife of the KimA, and the plaintiff DaD, KimE, and KimF are all the children of the KimA, who are all the related parties of the KimA.

B. KimA established a company that is a major shareholder of XX industry (hereinafter referred to as the "P industry"), Won, the representative director of the OO housing development corporation, and Won, the major shareholder of YY development corporation, a corporation with the purpose of housing construction business, real estate sale and implementation business on April 10, 2006 (hereinafter referred to as the "non-party corporation"). The plaintiffs also acquired the shares of the non-party corporation (hereinafter referred to as the "the shares of this case") and participated in the investment.

(The following table omitted):

C. On April 27, 2006, the non-party corporation entered into a real estate sale agreement (MU) with the non-party corporation to purchase 9 parcels, including the forest and field 19-3 dong mountain 19-dong, and the total of 398,228 square meters of the previous two parcels (hereinafter referred to as the "land of this case") at KRW 000,000, and paid KRW 100,000,000 of the shares of the XX industry corporation owned by the non-party corporation as a major shareholder of the non-party corporation, and 00,000,000 won borrowed from the foreign exchange bank with the stocks of the company of this case as security and borrowed from the foreign exchange bank.

D. On July 25, 2006, 2006, the non-party corporation entered into a regular sales contract to purchase the instant land from △△△ Co., Ltd. (hereinafter “the instant real estate sales contract”) and from Hah H to 000 won. The performance guarantee money paid earlier was to be substituted by the said sales contract. The non-party corporation paid 000 won for project financing funds borrowed by the method of issuing asset-backed securities (ABS) from △ Card Co., Ltd., and subsequently repaid the total amount of the debt borrowed from bB bank under the offer of KimA and the debt borrowed from GGG to prepare the said performance guarantee money.

E. In the event that the delay in permission and approval of the development project for the instant land was unsatisfyed, AA, a corporation, which had been practically holding approximately 50% of the planned marketization site at the time, proposed to acquire the entire shares issued by the non-party corporation through BB corporation (hereinafter “B”). The shareholders of the non-party corporation, including the plaintiffs, received the balance by March 5, 2007 after concluding a contract to transfer the entire shares owned in BB on December 28, 2006 (hereinafter “instant stock transfer contract”) at KRW 000 per share (hereinafter “the total transfer value”).

F. On May 31, 2007, the Plaintiffs reported and paid KRW 000 of each transfer income tax on the difference between the transfer value of non-party corporation’s stocks (value of KRW 000 per share x number of KRW 900 per share) and the acquisition value of KRW 000 per share (value of KRW 000 per share x 900 per share).

G. The director of the Seoul Regional Tax Office: (a) the result of the share change investigation against the non-party corporation; (b) the non-party corporation that participated as a shareholder; and (c) the plaintiffs acquired the pertinent land through the offering of collateral by KimA, a related party, etc.; and accordingly, (c) the plaintiffs increased to KRW 00 per share of the non-party corporation stocks that are zero, thereby notifying the defendants of the result of tax investigation that the gift tax should be imposed on the plaintiffs pursuant to Articles 2(3) and 42(4) of the Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter the same)

H. On March 15, 2010 and March 16, 2010, the Defendants imposed gift tax on the Plaintiffs on the following (hereinafter “each of the instant dispositions”).

I. The Plaintiffs filed an appeal with the Tax Tribunal on May 28, 2010, but the Tax Tribunal dismissed the Plaintiffs’ claim on May 27, 201.

[Based on recognition] Gap evidence 1 (including paper numbers, hereinafter the same shall apply) through 4, Eul evidence 1 to 5, the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiffs' assertion

The benefits accrued from the acquisition and transfer of the shares of this case are taxable as capital gains. The above provision is not applicable since the Plaintiffs cannot be deemed to have obtained gains from the increase of property value under Article 42(4) of the Inheritance Tax and Gift Tax Act, and the gift tax cannot be levied only on Article 2(3) of the Inheritance Tax and Gift Tax Act. Accordingly, each disposition of this case is unlawful.

B. Relevant statutes

It is as shown in the attached Form.

C. Determination

1) The system of introducing the complete comprehensive gift tax system and the provision of the Inheritance Tax and Gift Tax Act

A) The former Inheritance Tax and Gift Tax Act (amended by Act No. 7010, Dec. 30, 2003; hereinafter “former Inheritance Tax and Gift Tax Act”) borrowed the concept of donation under the Civil Act while there was no provision on the concept of donation. The concept of donation borrowing alone does not have a way to prevent the avoidance of gift tax by means of an altered donation under the Civil Act. As such, there were several regulations on deemed donation (Articles 32 through 42 of the former Inheritance Tax and Gift Tax Act). However, the provision on deemed donation alone points out the problem that it is difficult to cope with a new type of gift by means of a new type of gift financial product, financial technique, various capital transactions, etc., and thus, it was introduced the so-called comprehensive donation under the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010, Dec. 30, 2003; hereinafter “former Inheritance Tax and Gift Tax Act”) and Article 23(3) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010). 32 of the former Inheritance Tax and Gift Tax Act).

B) Article 2(1) of the Inheritance Tax and Gift Tax Act provides that donated property from another person’s gift tax is subject to gift tax. Article 2(3) of the same Act provides that “The term “donation” refers to a transfer of tangible or intangible property which can calculate economic values to another person without compensation (including a transfer at a remarkably low price) by direct or indirect means, regardless of the name, form, purpose, etc. of the act or transaction, or an increase in property values of another person by means of contribution.” Thus, the concept of donation distinct from a gift under the Civil Act was formulated separately. Articles 33 through 42 of the same Act are amended as an example provision on the calculation of the value of donated property by supplementing the contents of the previous provision on deemed gift under the Civil Act. In other words, a summary of the current Inheritance Tax and Gift Tax Act system can be divided into Article 2(3) of the Inheritance Tax and Gift Tax Act, and Article 42(1) of the same Act, which has the character of a tangible or intangible comprehensive provision (other than six capital transaction examples regulations), and individual donation regulations.

2) Whether the taxation is possible and its limit under Article 2(3) of the Inheritance Tax and Gift Tax Act

A) If a property is not a typical property or right provided under the Inheritance Tax and Gift Tax Act, even if it does not fall under the individual donation example provision, it is problematic whether a gift tax can be imposed pursuant to the said provision. In light of the background of the introduction of Article 2(3) of the Inheritance Tax and Gift Tax Act, legislative purport, structure of other provisions, etc., it is reasonable to deem that the gift tax based on Article 2(3) of the Inheritance Tax and Gift Tax Act can be imposed on the gift tax, in order to levy gift tax on the gratuitous transfer of property or increase in the value of property of various unforeseeable forms (see Supreme Court Decision 2(3) of the Inheritance Tax and Gift Tax Act, such as the change of the existing provision into the calculation provision of the value of donated property, etc. (see Supreme Court Decision 2(3) of the Inheritance Tax and Gift Tax Act, even if it is difficult to interpret Article 2(3) of the Inheritance Tax and Gift Tax Act as a confirmatory and declared provision (see Supreme Court Decision 208Du7828, Apr. 28, 2011).

In short, the concept of a complete donation included in Article 2(3) of the above Act can be defined as "the transaction and act of individual exceptional provisions pursuant to the concept of donation under the Civil Act + the transaction and act of individual exceptional provisions + the transaction and act of individual exceptional contract, and the act of increasing the property value by the transaction, act and contribution that cause the same division without compensation in the economic substance." Therefore, if there is no contract of donation under the Civil Act between the parties, and if the economic value can be calculated even if a new type of property is not used in the previous law or the transaction, it shall be deemed as a donation pursuant to the above complete comprehensive donation provision for the transfer of the property without compensation, or if it is possible to calculate the economic value thereof, it may be calculated as the value of the property pursuant to the Inheritance Tax and Gift Tax Act Article 32 or 42, or the evaluation provision under Articles 60 through 66 of the Inheritance Tax and Gift Tax Act.

B) Meanwhile, there is a question as to whether gift tax can be imposed by applying only Article 2(3) of the Inheritance Tax and Gift Tax Act to the acts that are similar to the transactions and acts governed by the individual exhibition rule or those similar to the above-mentioned restrictions, or those that do not satisfy the above-mentioned restrictions. Since the above-mentioned comprehensive donation provision is merely an example of assessment of gift tax, it is deemed that the transactions or acts deviating from the above restriction conditions are subject to gift tax pursuant to Article 2(3) of the Inheritance Tax and Gift Tax Act, and it is clearly necessary to strictly realize the purpose of taxation of comprehensive donation in accordance with the comprehensive donation provision. However, if the comprehensive donation provision exceeds the above restriction conditions, it is necessary to stipulate that the comprehensive donation provision may be imposed only on the individual gift subject to taxation by comprehensively taking account of the following: (i) whether the comprehensive donation provision can be imposed on the individual gift subject to gift tax even after the comprehensive donation provision, and (ii) whether the comprehensive donation provision can be imposed on the individual gift subject to taxation under Article 2(3) of the Enforcement Decree of the Inheritance Tax and Gift Tax Act.

C) Ultimately, in determining whether an act or transaction beyond the scope of individual exceptional provisions can be taxed through the analogical application of the entire comprehensive donation provision and the individual exceptional provision, the determination should be made by comprehensively taking into account (i) the intent of the complete comprehensive donation provision and the clearness of taxation requirements and predictability of taxpayers, (ii) whether the taxation condition of individual exceptional provisions is intended to regulate the limitation of taxation or examples as its subordinate concept under the uniform superior concept, (iii) whether the relevant exceptional provision is specific and clear (where the nature of the regulation is abstract and broad range, more strict interpretation); (iv) whether the method of calculating the value of donated property under the relevant exceptional provision is clear and reasonable; (v) whether the relevant transaction or act is the same as the subject matter of regulation in the individual provision and the economic substance; and (vi) whether the taxpayer’s predictability and equity in the imposition of gift tax, etc., should be made.

3) Whether the plaintiffs' act is subject to gift tax

A) If Article 3(2) of the Inheritance Tax and Gift Tax Act, and Article 42(4) of the Inheritance Tax and Gift Tax Act is applied directly

In order to apply Article 42(4) of the Inheritance Tax and Gift Tax Act, there is a need to apply Article 42(4) to ① a minor, etc., who is deemed unable to engage in the relevant act on his own account on his own account in view of his occupation, age, income and property status (hereinafter referred to as “main requirement”), ② a person who has been provided with inside information not published in connection with corporate management, etc. from a related party, or acquired property by directly borrowing funds or being provided with collateral from him (hereinafter referred to as “requirements for acquisition of property”), ③ within 5 years, such as implementation of development projects, change of form and quality, partition of co-owned property, business type and permission, listing and merger of shares and equity shares, etc. (hereinafter referred to as “requirements for increase in property value”). If the Plaintiffs participated in the acquisition of the shares of this case with the inside information that △△△△△△△△△△, etc., within the planned market value of the land in question, the above main requirement and requirements for acquisition of property cannot be deemed to have been met.

B) Possibility of analogical application of Articles 2(3) and 42(4) of the Inheritance Tax and Gift Tax Act

According to the purport of the evidence No. 6-1 and the whole arguments, AB, a related corporation of BB, owned the land adjacent to the land of this case within the planned urban area of Osan City, and thus, AB, based on the judgment that the exclusive implementation of the instant development project could maximize the business profit when it is conducted by combining the land of this case, it seems that B had B acquire the shares of this case from the plaintiffs at a high price in terms of securing the land of this case and compensating for the interest on the development project anticipated to be enjoyed in the future).

Upon examining the case’s return, it is difficult to view that Article 42(4)2 of the Inheritance Tax and Gift Tax Act applies mutatis mutandis to the Plaintiffs’ transactional act by comprehensively taking account of the following: (a) the Plaintiffs were entitled to take advantage of the transfer margin of the instant shares only based on the management judgment as above; and (b) the occurrence of future property value is objectively expected, such as the reasons listed in Article 42(4) of the Inheritance Tax and Gift Tax Act; and (c) it is difficult to deem that the economic substance is similar; (b) there is a need to interpret donations made by a third party as they are very diverse and standardized; and (c) it is difficult to deem it difficult to calculate the value of donated property because it is difficult to measure the degree of contribution affecting the increase of property value.

C) Sub-determination

As such, the Plaintiff’s assertion that Article 2(3) and Article 42(2) of the Inheritance Tax and Gift Tax Act, which the Defendant was liable for taxation, cannot be applied to the instant real estate transaction, is with merit.

3. Conclusion

If so, all the plaintiffs' claims are reasonable, it is decided as per Disposition by admitting them.